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The Epidemiology of Macroeconomic Expectations

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Christopher D. Carroll

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Abstract

Since the foundational work of Keynes (1936), macroeconomists have emphasized the importance of agents' expectations in determining macroeconomic outcomes. Yet in recent decades macroeconomists have devoted almost no effort to modeling actual empirical expectations data, instead assuming all agents' expectations are 'rational.' This paper takes up the challenge of modeling empirical household expectations data, and shows that a simple, standard model from epidemiology does a remarkably good job of explaining the deviations of household inflation and unemployment expectations from the `rational expectations' benchmark. Furthermore, a microfoundations or 'agent-based' version of the model may be able to explain, in a way that still permits aggregation, stark rejections of the pure rational expectations framework like Souleles's (2002) finding that members of different demographic groups have sharply different predictions for macroeconomic aggregates like the inflation rate.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8695.

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Date of creation: Dec 2001
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Handle: RePEc:nbr:nberwo:8695

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E0 - Macroeconomics and Monetary Economics - - General
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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References listed on IDEAS
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  1. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1992-2), pages 61-156. [Downloadable!]
  2. Laurence Ball, 1994. "What Determines the Sacrifice Ratio?," NBER Chapters, in: Monetary Policy, pages 155-193 National Bureau of Economic Research, Inc. [Downloadable!]
  3. Robert B. Barsky, 1986. "The Fisher Hypothesis and the Forecastability and Persistence of Inflation," NBER Working Papers 1927, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Bryan, Michael F & Gavin, William T, 1986. "Models of Inflation Expectations Formation: A Comparison of Household and Economist Forecasts: A Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(4), pages 539-44, November. [Downloadable!] (restricted)
  5. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1996-1), pages 1-76. [Downloadable!]
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  1. Michael T. Kiley, 2006. "A quantitative comparison of sticky-price and sticky-information models of price setting," Finance and Economics Discussion Series 2006-45, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  2. Eijffinger, Sylvester C W & Hoogduin, Lex & van der Cruijsen, Carin A B, 2008. "Optimal Central Bank Transparency," CEPR Discussion Papers 6889, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Robert Rich & Joseph Tracy, 2003. "Modeling uncertainty: predictive accuracy as a proxy for predictive confidence," Staff Reports 161, Federal Reserve Bank of New York. [Downloadable!]
  4. Javier Birchenall, 2007. "Escaping high mortality," Journal of Economic Growth, Springer, vol. 12(4), pages 351-387, December. [Downloadable!] (restricted)
  5. Michael F. Bryan & Stefan Palmqvist, 2005. "Testing near-rationality using detailed survey data," Working Paper 0502, Federal Reserve Bank of Cleveland. [Downloadable!]
  6. Martin Sommer & Christopher Carroll, 2004. "Epidemiological expectations and consumption dynamics," Money Macro and Finance (MMF) Research Group Conference 2003 92, Money Macro and Finance Research Group. [Downloadable!]
  7. Peter Tinsley & Sharon Kozicki, 2003. "Alternative Sources of the Lag Dynamics of Inflation," Computing in Economics and Finance 2003 92, Society for Computational Economics. [Downloadable!]
    Other versions:
  8. Mankiw, N. Gregory & Reis, Ricardo & Wolfers, Justin, 2003. "Disagreement about Inflation Expectations," Research Papers 1807, Stanford University, Graduate School of Business. [Downloadable!]
    Other versions:
  9. Athanasios Orphanides & John C. Williams, 2002. "Imperfect knowledge, inflation expectations, and monetary policy," Finance and Economics Discussion Series 2002-27, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  10. Maurizio Bovi, 2006. "Consumers Sentiment and Cognitive Macroeconometrics Paradoxes and Explanations," ISAE Working Papers 66, ISAE - Institute for Studies and Economic Analyses - (Rome, ITALY). [Downloadable!]
    Other versions:
  11. Lanne, Markku & Luoma, Arto & Luoto, Jani, 2008. "A Naïve Sticky Information Model of Households’ Inflation Expectations," MPRA Paper 8663, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  12. Damjan Pfajfar & Emiliano Santoro, 2007. "Heterogeneity, Asymmetries and Learning in InfIation Expectation Formation: An Empirical Assessment," Money Macro and Finance (MMF) Research Group Conference 2006 123, Money Macro and Finance Research Group. [Downloadable!]
  13. Marcelo Savino Portugal & Angelo Marsiglia Fasolo, 2004. "Imperfect Rationality and Inflationary Inertia: A New Estimation of the Phillips Curve for Brazil," Econometric Society 2004 Latin American Meetings 5, Econometric Society. [Downloadable!]
  14. Felix Geiger & Oliver Sauter, 2009. "Deflationary vs. Inflationary Expectations - A New-Keynesian Perspective with Heterogeneous Agents and Monetary Believes," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 312/2009, Department of Economics, University of Hohenheim, Germany. [Downloadable!]
  15. Stefan Palmqvist & Michael F. Bryan, 2005. "Testing Near-Rationality Using Detail Survey Data," Computing in Economics and Finance 2005 371, Society for Computational Economics. [Downloadable!]
  16. Bryan, Michael F. & Palmqvist, Stefan, 2005. "Testing Near-Rationality using Detailed Survey Data," Working Paper Series 183, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
  17. Bruchez, Pierre-Alain, 2007. "A Hybrid Sticky-Price and Sticky-Information Model," MPRA Paper 3540, University Library of Munich, Germany. [Downloadable!]
  18. Lena Vogel, 2008. "The Relationship between the Hybrid New Keynesian Phillips Curve and the NAIRU over Time," Macroeconomics and Finance Series 200803, Hamburg University, Department Wirtschaft und Politik. [Downloadable!]
  19. Emiliano Santoro & Damjan Pfajfar, 2006. "Heterogeneity and learning in inflation expectation formation: an empirical assessment," Department of Economics Working Papers 0607, Department of Economics, University of Trento, Italia. [Downloadable!]
  20. Paloviita, Maritta, 2007. "Estimating a small DSGE model under rational and measured expectations: some comparisons," Research Discussion Papers 14/2007, Bank of Finland. [Downloadable!]
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